Reflections on the budget by Hussain H Zaidi

It was rather amusing to watch the federal finance minister claim during the budget speech that the PPP government, having a needlessly large cabinet despite the economic crunch, is committed to living within its means as part of the efforts to stabilise the economy. But this is what the political economy of Pakistan is, where people in power want an increased share of a shrinking pie at the cost of allocative efficiency.

The budget is a statement of the fiscal policy by which the government makes decisions about public revenue and expenditure with a view to affecting output, employment, and inflation in the economy. However, the budget is also a political document, which is used to reward, appease or penalise certain constituencies. Both the economic and political aspects of the budget are determined by the constraints within which every government works. The same is true of the budget for the fiscal year 2012-13 (FY13).

The government will be spending Rs3.20 trillion in FY13. Whereas the current expenditure of Rs2.61 trillion accounts for 81.56 percent of the total expenditure, the Rs591 billion development expenditure constitutes only 18.46 percent of the total expenditure. A developing country like Pakistan needs to spend far more on development projects. But the familiar political-economy constraints do not allow the government to do so. An amount of Rs925.77 billion-which makes up 29 percent of the total expenditure-will be spent on debt servicing, Rs545.38 billion will be spent on defence products and services, while Rs256.51 billion will be allocated to pay and pensions. Taken together, these three heads will eat up 54 percent of the total expenditure leaving a rather narrow fiscal space to the government.

Debt repayment is an obligation that the Pakistani government owes to foreign countries and institutions as well as its own nationals. The massive military expenditure, on the other hand, is rooted in the country’s political system, which is dominated by the armed forces no matter which party is in power or what robe-democratic or despotic-the government puts on. It is easier for a party in opposition to criticise massive military allocation. But the very first lesson the same party learns when it enters the corridors of power is “Don’t mess with defence.”

Salaries and pensions have to be paid to the working and retired government employees. The Pakistani government’s discretion regarding allocation of resources starts only after meeting expenditure on these three heads. At present, the armed forces are engaged in putting down insurgency in the northwest, and therefore it is understandable that a sizeable part of the national pie is allocated to supporting that effort. But let no one labour under the impression that once that insurgency is quelled, the defence expenditure will come down.

Expenditure is one side of the budget, whose other side is revenue. Projected tax revenue during FY13 is Rs2.50 trillion including direct taxes of Rs932 billion and indirect taxes of Rs1.57 trillion (62.8 percent of the total tax revenue). This means indirect taxes will continue to be the major contributor to the public finance. Indirect taxes are easier to collect than direct taxes; however, the former tend to be regressive and inflationary as the tax burden is passed on to the final consumer. The tax-revenue target envisages 24 percent growth in the revised estimated receipts of Rs2.02 trillion in the outgoing fiscal year. The non-tax revenue target is Rs730 billion.

The projected federal government fiscal deficit is Rs1.18 trillion-4.7 percent of the estimated FY13 GDP-of which Rs971 billion will be met through domestic financing. Nearly half of that amount (Rs484 billion) will be raised in the form of bank borrowing. The FY12 budget had envisaged Rs303.52 billion bank borrowing; however, the revised estimates have gone up to Rs939 billion as the government has heavily resorted to printing of the currency courtesy the central bank. In the past is any guide, the fiscal deficit for the coming fiscal year is likely to well exceed the target, making for greater dependence on bank credit as a source of deficit financing. Interestingly, net borrowing from the State Bank for FY13 has been estimated at zero, which means no printing of money to finance the fiscal deficit. If achieved, the target, which at the moment looks too optimistic, to say the least, will bring down inflation.

The budget provides for 20 percent increase in salaries and pensions of government employees. If the purpose was to mitigate the problems of the masses, then the salary and pension increase will not deliver the goods unless inflation is brought down significantly; rather it might aggravate their problem. The reason is simple: In the absence of substantial increase in output or price control, any increase in salaries and pensions is likely to be offset by a proportionate, if not greater, increase in prices. The result will be that real incomes will further come down, which will hit the poorer section of society hard.

The 20 percent increase in wages means that, people earning Rs10,000 per month will get an only Rs2,000 rise, while people earning Rs40,000 per month will get a Rs8,000 increase. But prices will increase for both by the same margin. It is pertinent to mention that lower-income people spend a higher portion of their total income on essential items than people falling in the upper-income bracket. Thus, increase in wages should be accompanied by price control of basic commodities and services like transport by keeping an eye on cartels and artificial shortages.

Essential as the increase in salaries was, the government should have provided greater relief to the lower income employees than those with higher income by announcing higher percentage wage increase for the former. But then the political economy did not warrant such a decision.